What is Errors and Omissions Insurance?
Errors & Omissions Insurance (E&O) helps cover the costs of claims against your business that mistakes or omissions were made in providing its services. This coverage is also known as Professional Liability Insurance. Typically, these claims are made by customers or clients of your business who claim they suffered damages because of mistakes your business committed while providing professional services.
Businesses that offer services and consulting typically need Errors and Omissions coverage. Anytime a business offers guidance or advice, there’s the possibility that a client may come back and make a claim against the business. For example, a brokerage firm may give a business advice on how to invest its employees’ 401(k). The financial advice doesn’t turn out as planned and the client business loses money. The client makes a claim against the brokerage firm for losses. Errors and Omissions Insurance can help cover the costs of this claim.
What is Covered by Errors and Omissions Insurance?
Errors & Omissions Insurance covers a range of expenses your business may incur when a professional liability claim is made against it. This is important because liability claims can be expensive. The defense attorneys’ fees and court costs can be overwhelming – not to mention the possible costs to settle a claim.
Attorney Fees. Defense lawyers usually charge by the hour. The typical rate for a lawyer ranges from $100-$200 an hour2 Lawyers in metropolitan areas may charge up to $400 an hour. And some liability cases can last anywhere from several months to a couple of years. Typical litigation costs for small businesses can range anywhere from $3,000 to $150,000.3 Only one third of those cases cost less than $10,000.4 Even if the claim doesn’t go to court, you may still need to pay a lawyer to respond to the claim and provide counsel. This can cost up to $5,000.5
Court Costs. It can cost several hundred dollars just to reserve the court room where case will take place. If the case drags out, this can easily cost several thousand dollars. In addition to the court costs, you may need to pay for witnesses. These witnesses could be experts or eyewitnesses who saw the incident take place. Expert witnesses may be needed for medical or technical evaluations of the case. For example, an engineer may be called as a witness to provide her expert opinion on the case. This engineer may claim that your business was negligent in regards to standard engineering policies. Or, an expert may be called in to help defend your business. This expert may say that your business did everything correctly and the fault was the client’s. Either way, these experts aren’t cheap.
Administrative Costs. Lawsuits depend on documentation and it takes manpower to gather and compile these documents. A few examples of the types of documents that may be important to a case include medical records, business receipts, customer waivers, written testimonies, business contracts, employment records and invoices. In addition to that, court reporters who transcribe almost everything that that is said in depositions and court must be paid. The amount of documenting and organization is formidable. But it’s essential to the legal process. It also costs a lot of money. Office managers, receptionists, legal assistance and court reporters are just some of the staff required to document all the information. Their skills are costly and the hours they work are many. It doesn’t take long for admin costs to skyrocket during a legal claim.
Settlements and Judgements. Of course, lawyer, court and admin costs pay for the process that culminates in a judgment or settlement. The settlement fee or judgement is the amount of money your business pays to the plaintiff – the one who made the claim against your business - if you lose the case. To put it bluntly, your business probably can’t afford to pay a significant liability judgement or settlement out of operating income and still remain in business. Settlements can typically range from a couple thousand dollars to millions of dollars. Even a claim that’s only a few thousand dollars can be enough to shutter most businesses’ doors.
If you don’t have E&O Insurance and a claim is made against your business, you could be at risk for paying these types of expenses with your own business and personal assets. If your business does have Errors and Omissions insurance, you can rest easier knowing that your policy is designed to help cover most of these costs. Even if mistakes were made by temporary workers or contractors on your payroll, E&O can help cover the claims that may result.
There are certain situations that Errors and Omissions Insurance typically does not cover.
Illegal Acts and Purposeful Wrongdoing. Errors and Omissions Insurance typically does not cover a claim if you intentionally broke the law or deceived customers or clients. For example, a contracting business is hired to redo a customer’s kitchen. The customer requests a certain type of wood and granite countertop be used. The specified wood and granite countertop are incredibly expensive, but there are imitation materials that look very similar and are much cheaper. The contractor charges the customer for the requested wood and granite countertop but uses imitation materials. The customer finds out and makes a claim against the contractor. In this case of deception, E&O Insurance probably won’t cover the claim.
General Liability. Errors and Omissions Insurance does not cover third-party bodily injury or property damage claims made against your business. For example, a customer slips on a wet floor in your store and hurts her back. She makes a claim against your business for her related medical expenses. This claim would not be covered by E&O Insurance. However, a claim like this could be covered by a General Liability Insurance policy. Or, let’s say one of your employees is operating equipment and accidentally damages another business’s office building. That business makes a claim against yours for the cost of the damages. Again, E&O Insurance does not cover this type of claim. General Liability Insurance would be the right coverage for a claim like this.
Employee Claims. Errors and Omissions Insurance does not cover employee claims. For example, an employee is moving heavy boxes in the storeroom of your office. He trips while moving a box and injures his back. The employee makes a claim against your business to help cover the wages he loses while he is out of work. He also requests that you pay for his medical expenses. This type of claim could be covered by Worker’s Compensation Insurance, not E&O. E&O also does not cover employee disputes. For example, one of your younger employees has been putting in extra hours and doing a lot of career development. Because of this, you give him a raise. An older employee makes a claim against your business, saying that he was due for a raise but was not given one because he was older. He makes a claim that your business is discriminating because of age. E&O will not cover this claim. This type of claim could be covered by Employee Practices Liability Insurance.
Why Do You Need Errors and Omissions Insurance?
At this point, hopefully you realize an errors or omissions claim has the potential to become so expensive as to risk your business’s survival. Even if a claim is dropped by the plaintiff, you’ll still have legal expenses which could amount to thousands of dollars. If the claim goes to court, you could be looking at tens or even hundreds of thousands of dollars in costs. And if you are found at fault or even agree to settle the claim out of court, expect to pay. Without Errors and Omissions Insurance, all of these costs might have to come out of your own business and personal assets.
Who Needs E&O Insurance?
Businesses that typically need errors and omissions insurance include:
- Advertising and Media Firms
- Marketing Firms
- Cultural Organizations such as Museums and Galleries
- Educational Businesses such as Schools and Colleges
- Financial Institutions such as Accounting Houses and Brokerage Firms
- Insurance Agencies
- Medical Facilities and Offices
- Barbershops and Hair Salons
- Printing and Publishing Companies
- Pet Services such as Veterinary Offices and Pet Groomers
- Law Firms
- Real Estate Agencies
How Much Does Errors and Omissions Insurance Cost?
Typically, small businesses might pay approximately one hundred or more dollars a year for their Errors and Omissions Insurance policy.6 Liability claims can be costly. The average lawyer fee is between $100 and $200 an hour. And some claims can take over a year to settle. Then add in the cost of administrative work. This includes the court reporter who transcribes everything said in a deposition or court case, and other lawyers, office managers, and legal administrators who document and organize all of the information for the liability claim. When you factor that in, plus the courtroom costs, you can easily be looking at tens of thousands to hundreds of thousands of dollars in cost. And that doesn’t include the settlement. Liability settlements can range anywhere from several thousand to millions of dollars. Without Errors and Omissions Insurance, you may have to pay those costs with your business and personal assets.
With E&O insurance, you can rest more easily knowing that you’re covered in the event that a Professional Liability claim is made against your business. Depending on the type and size of your business, you can get peace of mind for a relatively small price. Small businesses may pay a few hundred to a couple thousand dollars a year for their E&O policy.7
How much you pay for your Errors and Omissions Insurance may depend on several factors.
Business Risk. If your business is in an industry that deals with a high volume of E&O claims, you may have to pay more than average for your coverage. Also, if your business is at a higher risk of having a very large claim made against it, your premiums may also be higher. For example, a financial consulting agency that advises companies on how to invest millions of dollars will probably have higher premiums than a financial agency that advises businesses on how to invest hundreds to thousands of dollars.
Coverage Limits. Your policy limits also factor into the cost of your E & O premiums. Higher limits mean more coverage and usually higher premiums.
Claim’s History. Typically, you may pay more for your E&O coverage if you have an extensive history of liability claims made against your business.